ETFs For The Bear Market

For the last 2 weeks, the rolling 3-month, quarterly average for cash accounts has outperformed all 42 of the Fidelity Select Mutual Funds. In the relatively rare times when this has occurred in the last 21+ years, the stock market gained 23% on average for the next 12 months.

Think about that for a moment. The S&P 500 closed at 1395 this past Friday, 2/1/08. We have historical evidence that supports the notion that the S&P 500 may find itself at 1715 on 1/31/09.

And there's more. The American Association of Individual Investors [AAII] has an investor sentiment indicator that has dropped to its 2nd lowest 4-week moving average level since it began in 1986. The one time that it was more grim? The August-November 1990 bear market for stocks, where investors struggled with the coming recession and the savings-and-loan crisis.

It's worth reminding investors of what followed the brief 1990 bear. We did have a recession in 1991. We also witnessed stocks vault 25% to 30% smack dab in the middle of that recession. It's also worth remembering that financial stocks led the way back.

We've already seen intra-day bearish market lows of 1270 on the S&P 500. One could quibble with the idea that we did not hit 1252, and that we only fell 18.75%. But that's silly.

No matter how you slice it, the Fed jumped in aggressively when they did, and Congress acted when they did. And while retesting the lows on additional uncertainty in the next 6-8 weeks is far from out of the question, they will likely be the buying opportunities that investors with cash ought to be grabbing.

It will be tough to make the purchases in the middle of more uncertainty. But a variety of investments are looking better and better.

We mentioned the S&P 500, but I like Vanguard's Total Market Index (VTI) for total market coverage. It is a mere 2% below its 50-day moving average... a signal that many will likely be watching very closely.

Perhaps one of the diamonds in the rough are the transportation stocks. The iShares Dow Jones Transportation Index (IYT) is one of the few segments that has solid 2008 gains, whereas most of the market struggled through one of the worst Januaries on record.

IYT may have benefited from the pullback in crude oil. It may simply be benefiting from sector rotation after losses in 2007. Either way, it is handily above it's short-term, 50-day average, and it is very close to climbing back above its longer-term, 200-day moving average.

There's one other ETF that I feel deserves some attention. And while I do not feel as strongly about this investment as I do about the potential of other ETFs mentioned in my previous posts, the WisdomTree Low P/E Fund (EZY) is worthy of discussion.

The concept of an exchange-traded fund that tracks low p/e stocks certainly sounds appealing on the surface. History proves that, in the long run, lower p/e stocks outperform.

Yet, when one looks at the trading pattern of EZY, one cannot find a genuine discrepancy between its price movement and that of the iShares S&P 500 Value Fund (IVE). And one already knows that value hunters/bargain shoppers use low p/e ratios in their decision-making process.

Were it not for the exceptionally low volume on the WisdomTree Low P/E Fund (EZY), I might be inclined to look that direction. However, until there's a more convincing discrepancy between Low P/E's low volume and IVE's greater "trade-ability," I have to give the nod to the latter.

Comments

[westwest888:]

Interesting. I have historical evidence that supports the notion that the S&P 500 may find itself at 715 on 1/31/09. Yeah, a 7-handle. Three digit S&P 500.

2008 Feb 05 12:29 PM

[granger:]

I have been using the EZY as my main proxy for the S & P, along with the DHS (75%, 25% respectively). Both Wisdomtree. Yes the volume is light, but I am a buy and hold, so my shares will not be coming up for sale anytime soon. Note: I have been agreesively buying the EZY the last few weeks. I believe we are seeing one of the best the buying opportunities of the last 20 years. I am almost 100% investd at this point. For me that is 80% equities, I am at 77% as of this writing. Long and strong. Ignore the noise.

2008 Feb 08 02:19 PM